Human Capital Investment Essay

Question: Assess the benefits to an LDC if they invest in human capital.

Maybe the most important factor in the development of an LDC is investment in human capital. Human capital includes the education, skills and health of workers. An improvement in human capital directly impacts on development as it affects the income, health, living standards and social and political freedoms of an LDC’s population. Human capital is key for an LDC’s long-run growth and self-sufficiency. But, a very large investment may be required. LDCs may not have the funds to do this. People will need to save but this means a decrease in current consumption which is near impossible given that people will be living close to poverty.

An investment in education means workers’ skills improve and they become more efficient so they can produce more, the economy’s PPF shifts outwards and real GDP rises. Also, workers are better educated so they can adapt and work with machinery and new technology, this helps an economy to develop its manufacture sector. Rapid growth of the East Asian Tigers South Korea, Taiwan, Singapore and Hong Kong was driven by investment in the manufacture sector but also human capital. Investment in education allowed a skilled labour force to develop and operate the machinery in the manufacture sector. In 1950, Taiwan made 6 years of education compulsory and extended this to 9 years in 1968, an emphasis was placed on female education. Between 1960-2000, Taiwan’s annual economic growth rate averaged 7%. However, after people are educated they are ready to work so LDCs must also incentivise domestic firms to invest, attract MNCs and develop the infrastructure to create jobs. If jobs are not ready for recently educated people then unemployment will rise.

Additionally, because workers’ skills improve, their marginal productivity of labour rises so they should be able to obtain better jobs and earn higher wages. A higher income means workers can buy more goods and services so living standards rise. Also, better literacy and numeracy means people can read and write so they can enjoy social and political freedoms. On the other hand, LDCs could suffer brain drain. Maybe LDCs educate their population and then the educated workers leave to earn higher wages in developed countries. The initial educational investment then goes to waste.

Furthermore, if females are given at least a basic primary education in literacy, numeracy and health then future generations will have a better education and health. Female education is key for the development of future generations. Robin Jeffery posits that “literate men have literate sons, literate women have literate children.” Although, income inequality may rise. LDCs must focus on basic education (for example, literacy, numeracy and health) so that the most vulnerable members of society benefit. If instead LDCs invest in universities then this most likely only benefits the rich and allows them to earn higher incomes while the poor do not benefit, so income distribution worsens.